Heterogeneous responses to effective tax enforcement: evidence from Spanish firms

We investigate whether monitoring the information trails generated by firms’ activities improves tax compliance. We exploit quasi-experimental variation generated by a Large Taxpayers’ Unit (LTU) in Spain, which devotes additional resources to verifying the transactions reported by firms with more than e6 million in reported revenue. Firms bunch below this threshold in order to avoid stricter tax enforcement, and this reaction is stronger in sectors where paper trail is easier to monitor. These results suggest that monitoring efforts by the tax authority and the traceability of information reported by firms are complements, and both are necessary for effective tax enforcement.